Chapter 23: The Government and the Economy

Section 1: The Role of Govt Providing Public Goods -Most goods and services that businesses produce are *private goods, or goods that when consumed by one individual, cannot be consumed by another. -Consumption of private goods and services is subject to the *exclusion principle. This means that a person is excluded from using that good or service unless he or she pays for it. *Private goods- are items we normally buy such as clothes, shoes, food, & so on. *Private services- include such things as insurance, haircuts, medical services, auto care and telephone services.

*Public goods- are goods that can be consumed by one person without preventing the consumption of the good by another. -Consumption of public goods is subject to the *nonexclusion principle. This means that no one is excluded from consuming the benefits of a public good whether or not he/she pays. -Public goods- include public parks, public libraries, museums, highways and streetlights. -Because of the difficulty of charging for public goods, the govt usually provides them.

Dealing with Externalities -The govt also plays a role in handling externalities. *Externality- is the unintended side effect of an action that affects someone not involved in the action. Example- Workers get a bonus at work. Restaurants and stores in the area will probably see their sales go up. The businesses experience externalities. -Many govt activities encourage positive externalities. -Some can be negative. That happens when an action harms an uninvolved third party.

Maintaining Competition *Monopoly- a sole provider of a good or service. -With no competition, a monopoly can charge any price it wants, and consumers may suffer. Antitrust Laws -One of the goals of govt has been to encourage competition in the economy. *Antitrust laws- are laws to control monopoly power and to preserve and promote competition. *Sherman Antitrust Act This law banned monopolies and other business combinations that prevented competition The government broke up the Standard Oil Company s - The government broke up AT&T.

Mergers -Whenever a *merger, a combination of two or more companies to form a single business, threatens competition, govt may step in to prevent it. Example - govt may not allow Staples and Office Max to merge.

Regulating Market Activities -Govt regulation is needed in three important areas. Natural Monopolies *Natural monopolies - a market situation in which the costs of production are minimized by having a single firm produce the product. -In exchange for having the market all to itself, the firm agrees to be regulated by the govt -This is why so many public services such as gas, electricity and water are delivered by a single producer.

2. Advertising and Product Labels -Govt is also involved when it comes to truth in advertising and product labeling information. -The *Federal Trade Commission (FTC)- deals with problems of false advertising and product claims. -The *Food and Drug Administration (FDA)- is the agency that deals with the purity, effectiveness, and labeling of food, drugs and cosmetics. 3. Product Safety -From time to time the *Consumer Product Safety Commission recalls products that pose a safety hazard. *Recall - a company pulls a product off the market and agrees to change it to make it safe.

Section 2: Measuring the Economy Measuring Growth -One measure of an economy's performance is whether or not it is growing. -The *Gross Domestic Product (GDP)- is a measure of the economy's output. -Remember: GDP is the dollar value of all-final goods and services produced in a country in a year. *Real GDP- shows an economy's production after the distortions of price increases have been removed. -This eliminates the false impression that output has gone up when prices go up.

Business Fluctuations -The economy tends to grow over time, but does not grow at a constant rate. -Instead, it goes through alternating periods of growth and decline that we call the *business cycle. (p. 509)

Expansions -An economic *expansion- takes place when real GDP goes up. -At some point, real GDP reaches a *peak- the highest point in an expansion. Then it starts to decline. -Expansions are normally longer than recessions. The longest recent expansion lasted from March 1991 to March 2001, exactly 10 years. Recession *Recession- takes place when real GDP goes down for six straight months, although most last longer than that. -Fortunately, recessions tend to be shorter than expansions, with an average recession lasting about one year. -Even so, recessions are painful times. When the economy declines, many people lose their jobs.

Unemployment -Another way of measuring the economy is to look at employment. -Economists start by identifying the *Civilian labor force- which includes all civilians 16 years old or older who are either working or looking for work. The *Unemployment Rate- is the percentage of people in the civilian labor force who are not working but are still looking for jobs. (p. 511).

Fiscal Policy -Times of high unemployment create stress for many people. High unemployment becomes a problem that requires some govt action. -When the govt does step it, it uses *fiscal policy, which is changes in govt spending or tax policies. -The govt might cut taxes, for instance. It takes this action hoping that with more money in their pockets people will buy more goods and services. -Sometimes the govt increases spending. By buying more goods and services itself, it tries to convince businesses to hire more workers to boost production.

Price Stability *Inflation- is a sustained increase in the general level of prices. -Inflation hurts the economy because it reduces the purchasing power of money and may alter the decisions people make. -To keep track of inflation, the govt samples prices every month for about 400 products commonly used by consumers. -This is called the *Consumer Price Index (CPI), which is the popular measure of the price level. Inflation and the Value of Money -Inflation also reduces the value of money in a savings account because it will buy less after inflation than before.

Tax Policies -Another way the govt helps poor people is with a *Progressive income tax - which means that the tax rate is lower at lower incomes and higher for higher incomes. -This allows lower-income families keep a larger proportion of their income in taxes. -Many low-income federal workers use the federal *Earned Income Tax Credit (EITC)- which gives tax credits and even cash payments to qualified workers.

Section 3: Govt, the Economy, and You Education -The level of education a person earns has a major impact on a person’s income. -Someone with a bachelor’s degree earns nearly twice the income as a high school graduate. Discrimination -Is one of the reasons some people do not receive higher incomes. -The govt has passed several laws several laws to reduce discrimination. *The Equal Pay Act of requires equal pay for jobs that require equivalent skills and responsibilities. *The Civil Rights Act of bans discrimination on the basis of gender, race color, religion, and national origin. *The Americans with Disabilities Act of extended this protection to people with physical and mental disabilities.

Welfare Programs -Most welfare programs are federal programs. *Food stamps- are govt coupons that can be used to purchase food. *Women, Infants, and Children (WIC) program- provides help with nutrition and health care to low-income women, infants, and children up to the age of 5. Income Assistance *Supplemental Security Income (SSI)- gives payments to blind or disabled people and to people age 65 and older. *Temporary Assistance to Needy Families (TANF)- is another direct cash program that makes payments to families who need help b/c a parent is dead, disabled, or absent. -The number of months a person can receive TANF is limited. *Workfare- is a term used to describe programs that require welfare recipients to exchange some of their labor in exchange for benefits. -Most of these programs are run at the state level, and are designed to teach people the skills they need to succeed in a job. -People who are part of workfare often assist law enforcement officials or sanitation and highway crews.